Leasehold improvements home office: Maximize Your Tax Savings

Have you made some renovations or leasehold improvements to your home office?  You should be claiming any “repairs” in the year that they occur, but you have some options when it comes to claiming the amortization from leasehold improvements to your home office.

However be aware that this option may mean losing your homes principle residence exemption and creating a future income tax liability.

If you deduct the amortization of any leasehold improvements made to your home this could result in the loss of the principle residence exemption

If you claim the amortization from leasehold improvements to your home office on the current and following years return, you will receive a deduction against your business income. When you sell your home, the following scenarios may also take place:

1. The principle residence exemption allows you to usually reduce the gain on the sale of your home to nil. If you were to deduct the amortization of any leasehold improvements made to your home this could result in the loss of the principle residence exemption (PRE). If you lost the PRE then there is a risk that some of or possibly the entire gain on the sale of your home would be included in your income at a 50% inclusion rate.
2. You would also experience recapture of the amortization, known as capital cost allowance (CCA), on your home when you sell the property. Or you can read the full info here to manage your property. This recapture is taxed at a 100% inclusion rate since it’s really just recovering the amortization that was claimed previously.

When you compare the two options of taking CCA on the leasehold improvements to your home office and not taking CCA on the leasehold improvements, generally not taking CCA on the leasehold improvements is the most tax efficient and will be of greatest benefit when the house is sold. Taking CCA can create a current benefit, but will potentially create an even greater future tax liability. If you are unsure whether you should take CCA on leasehold improvements to your home office, please contact us at KWB to discuss which option is right for you.

CRA has completed an income tax folio with information about a principle residence and the principle residence exemption

http://www.cra-arc.gc.ca/tx/tchncl/ncmtx/fls/s1/f3/s1-f3-c2-eng.html

If you would like more information or have any questions, feel free to contact us at 780.466.6204, or click here to send us an email.

Thanks to Jean Dubois of KWB Chartered Accountants for providing this content.